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McKinsey’s systematic under valuing of the value of efficiency

January 9th, 2010 · 7 Comments

Economy versus the Environment. This is a slogan for many when they consider the challenges of dealing with Climate Change and the reduction of greenhouse gas (GHG) emissions.

In 2007, McKinsey issued Reducing US Greenhouse Gas Emissions: How Much at What Cost? that provided a a significant contribution to this discussion. McKinsey’s conclusion: at an “affordable” cost of well below $50 per ton, in aggregate, the United States can meet necessary 2030 targets for GHG emission reductions. All-in-all, this was quite good news for those advocating acting to deal with Climate Change.

There was (and is) reason why the original study and McKinsey’s continuing work in this arena have been widely discussed / cited over the past two years. And, variants of the graphic on cost abatement have shown up in briefing after briefing, article after article, book after book.

Good news. Or, well, is it?

McKinsey’s work provides significant data that addressing the Environment will have Economic cost. Even if a low number, with many actions providing economic benefit, the McKinsey work has a serious underlying thematic: it will cost to address climate change. Perhaps not a horribly painful cost, but a cost nonetheless.

While the McKinsey reports (and, again, the broadly used graphics) demonstrate that we can achieve a substantial portion of the necessary carbon reductions at a net positive for the economy, their discussions and representations leave this as a discussion of “cost” to take action, even if a far lower cost than self-proclaimed “climate skeptics” and others working to hinder a move toward a clean energy economy would claim.

Is this, that action on reducing carbon will “cost”, truly an accurate conclusion to draw from McKinsey report?

Consider what the McKinsey team did not consider (107 pg pdf, pages xvi-xvii):

“The project … did not examine economy-wide effects …  Did not attempt to address other societal benefits from abatement efforts, such as improved public health from reducing atmospheric pollution or improving national security. …”

In other words, this is a highly conservative and stove-piped analysis. The conservative approach almost certainly significantly overstates the costs for Global Warming abatement while potentially just as significantly understating the benefits of system-of-system interactions.

Lets take just a few examples of how this stove-piping might have distorted the end results:

In other words, the national security and trade balance and health and jobs and other benefits that McKinsey seems to have excluded from the analysis likely make the net result from addressing Climate Change a positive benefit, rather than a negative cost, for the economy.

There is yet an even greater ‘uncounted’ element that tips the scale from “cost” to “benefit”: the ‘insurance’ value of mitigation efforts reducing the future impacts of catastrophic climate chaos.  While humanity already faces real economic (and other) impacts from climate change and those will grow more significant in coming years, mitigation efforts offer the potential for reducing future impacts and future costs.  This, however, is yet again explicitly not part of McKinsey work:

The project did not attempt to assess the benefits to society from reducing global warming.

When one begins to assess the myriad of direct and indirect benefits excluded from the McKinsey work, their conclusion that we can successfully take action to mitigate climate change for costs below $50 per ton of carbon begins to look quite pessimistic. Counting in that ‘insurance value’ and the benefits of reducing climate change impacts, the famous graphic begins to look like a dire doom & gloom scenario.

Sadly, for whichever set of reasons, those seeking to lay out honest economic discussions as to the cost structure for serious engagement on climate change issues seem to systematically apply conservative analytical principles.  This analytical ‘conservatism’ (caution) is not matched by those striving to impede action toward a clean energy economy, who systematically engagement in distortion and outright deceit in their efforts to misinform the public and decision-makers.  The analytical caution (’conservatism’) ends up fostering a discussion about relative amounts of cost of action (high or low cost of action) when the real societal discussion should be the costs of inaction in the face of ever-more conclusive scientific work on climate change and the benefits from acting to mitigate climate change.

NOTE:  The “problem”, here, is not with the McKinsey team (at least not fully).  Modeling and valuing ‘positive feedbacks’, attempting to quantify productivity gains across society from ever-’greener’ work places, and placing meaningful figures on the ‘insurance value’ of mitigation are not simple tasks. And, the McKinsey team forthrightly and explicitly laid out that they did not attempt to take on these sorts of challenges. The problem lies with those who ‘crib’ from the McKinsey work while failing to highlight the study team’s openly stated constraints that fostered a pessimistic statement about the true value of action.

Also, to reinforce, this is not ’solely’ an issue with McKinsey & Co work. Here are some related discussions:

Tags: Energy · Global Warming · analysis · climate change · energy efficiency

7 responses so far ↓

  • 1 Osbert Lancaster // Jan 10, 2010 at 3:34 am

    Intersting perspective, and useful reminder of the importance of considering the frames of reference and assumptions of analyses like this.

    It’s easy to see why McKinsey and others make these ‘conservative’ assumptions:

    1. Modelling those second and third order system changes is technically challenging, often requires one to make big assumptions, and introduces greater levels of uncertainty;

    2. This leaves the report writers open to challenge by sceptics.

    Is it tactically better to produce a relatively conservative report, where you can robustly defend all elements, or a more optimistic one where you open up, often perfectly legitimate, grounds for argument? Especially when doubt about a couple of assumptions or details of more complex methodology could be used to rubbish the whole exercise.

    One way of avoiding that problem is to present the conservative results, and then spell out, like in this blog, why it might likely to be an underestimate. This could still be risky though, giving a crack for sceptics to say you’ve reached conclusions without data!

    It’s always important to think about how ones report might be interpreted and used.

  • 2 A Siegel // Jan 10, 2010 at 9:21 am

    Osbert

    Thank you for the thoughtful comment. I agree with your points.

    System-of-system implications are hard to model (positive feedback, for example) and require even more explanation than stove-piped work. That increased difficulty, increased assumptions/model imputs, and requirement for explanation opens the door for criticism. Writ large, this seems to have driven analysis toward that systematic understatement that this post discusses.

    Last spring, Greenpeace released a quite good volume in its Energy [R]evolution work, which concluded that it would be a net profit to switch to a clean energy economy. That work, however, grossly underestimated the benefits (as discussed in here).

    What is missing?

  • The avoided costs from catastrophic climate change.
  • The avoided costs from reduced acidification of the oceans.
  • The savings and benefits of reducing the 24,000+ deaths annually, in the United States alone, attributable to pollution from coal-fired electricity plants. (Not to mention the 500,000+ asthma and 38,000+ heart attacks).
  • The improved average IQ (in the US and globally) through reducing mercury (from coal emissions) inthe food chain.
  • Improved water supplies due to reduce fossil-fuel processing and power plant demands, and reduced pollution of supply sources.
  • Improved National Park views due to reduced fossil-fuel pollution.
  • Improved business productivity (”greening” work spaces leads to 10-25% productivity improvement) and educational performance
  • And, the list can go on, and on, and on …

    Greenpeace should be applauded for the quality of result from their project. This is a meaningful study. A study that shows that we can achieve a prosperous and climate-friendly society, meeting scientific targets for greenhouse-gas emission reductions, and do so at a “profit”. While recognizing this, we should also be clear: this report greatly underestimates the true value of pursuing an energy efficiency and clean energy future.

  • 3 rustneversleeps // Jan 18, 2010 at 12:54 pm

    Just hunting around for a spot on your site where this would be germane.

    I think you might want to be made aware of two books that are being published by Prof. Danny Harvey at University of Toronto. They focus on the implied energy (and other) solutions we need to keep atmospheric CO2 below 450 ppm. Volume 1 is primarily on efficiencies, Volume 2 on carbon-free energy sources. I posted the pertinent links here.

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